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What are the main problems encountered during the formation of alliances

Executive summary

This essay aims to examine the subject of strategic alliances, a common path used by organisations in many industries for expansion or advancement. It follows a simple approach of understanding the concept of strategic alliances and their background, with strong emphasis on why they hold an important place in the business world. It follows on with an in-depth look at the benefits and pitfalls that such an option brings, and what qualities an organisation should look at when proceeding down this track. The paper concludes with an analysis of the literature studied, trying to summarise a simple framework for assessing whether this option is viable in any particular organisation’s case or not.

Research for this essay has been from an assortment of sources: lecture notes, journals and books. The essay has tried to complement the theory with examples from the real-world, enabling a better understanding of how organisations have managed their individual situations when having chosen to form alliances.

Discussion

Strategic alliances are agreements between two or more organisations, looking to work together and/or share resources for the benefit of the parties of the alliance. These agreements are voluntary and allow for the involved organisations to remain separate businesses, thus making them distinct from mergers and acquisitions.

The concept of forming alliances can be traced back to the early 1900s, with Toshiba being one of the first to take this approach in 1906 (Devlin, et. al., 1988). For long they were considered exceptions to normal operations, since they were mainly formed on an adhoc basis to deal with specific situations. But this has changed with the change in the business environment, becoming the rule rather than the exception (James, 1985).

Organisations can choose from a range of options when deciding to enter into a strategic alliance with other parties. This can be a simple cooperation agreement, or a more complicated joint venture. The choice depends on the level of interaction that is required, as well as the nature of agreement needed: are the organisations looking to continue competing with each other in the same industry, or are they preparing to enter an era of cooperation (Bartlett, et. al., 2008).

Strategic Alliances

“Businesses once grew by one of two ways: grass roots up, or by acquisition… Today businesses grow through alliances…”

Peter F. Drucker

There are several reasons which prompt organisations to look at strategic alliances with other organisations. Firstly, it is seen as a mechanism for reducing uncertainties for the involved parties. The uncertainty could be within the competitiveness in the market/industry [external to any single organisation], or linked with a lack of resources and operational capabilities required to cope with looming times [internal to an organisation]. (Drago, 1997)

Secondly, and a more common reason, is the opportunity for international expansion or the gateway for entering international markets. This is important as it allows organisations to remain competitive with the assurance of new markets, and possibly new products, to increase their reach in an industry.

Another reason that organisations go down the strategic alliance path is to diversify. The diversification could be linked to other segments within the organisation’s current industry, or a totally new industry where the organisation can see some form of amalgamation in the future. The result is a hybrid organisation with a smooth flow of revenue.

A good example of this reasoning is the pharmaceuticals industry, where research and development [R&D] cost is quite high and can take several years, even decades, to recover. Over the last few years, and in the current tight financial situation, major players in the industry like Novartis, Pfizer and Roche have started looking at possible alliances to boost their bottom-line. In some cases, this has involved entering agreements with smaller bio-technology firms for short-term gains, as the lack of investor support has moved the industry to focus more on quicker returns on products. In other cases, it has seen stakes being taken in other segments of the medical industry to grow the product portfolio.

Strategic alliances are also useful for increasing knowledge base. A lot of companies tend to focus joint efforts on R&D that could be useful to all involved parties, as continuous innovation allows for better chances of survival in the market.

In recent times, strategic alliances between corporations and institutions of higher education have become more common. The partnering of businesses with higher education institutions is not merely to cut costs, but also encouragement for technology and knowledge transfer efforts, an area where academic research plays a crucial role. A real-world example of this is the Massachusetts Institute of Technology (MIT) in the USA. It commits to large scale, multi-year, multi-program alliances with various organisations, helping it to learn the management of partnerships. For the corporations, it allows for immediate access to knowledge. For MIT, it not only brings in significant sponsorship for research and facilities, but also provides openings to promising careers for its students. On the general scale, universities have started becoming the hub of various start-ups, which end up forming some sort of alliance with major corporations (Elmuti, et. al., 2005).

Advantages of Strategic Alliances

Organisations enter into strategic alliances based on several benefits that they see possible from this step. Sharing of costs, resources, risks, gaining knowledge and obtaining access to new markets are some positives that can be ascertained from such a venture.

Firms in knowledge-intensive industries benefit by teaming up with potential customers to share the risks and mounting costs of new product development (Baughn, et. al., 1997).

While organisations enter into various forms of alliances for various reasons, joint participation means that each entity is an equal partner in the new project, and hence is able to share the responsibilities of setting up and managing.

Also, those organisations facing some form of resource or operational uncertainty and with an inability to cope individually can highly benefit by entering an alliance with an organisation that will compensate for those uncertainties. This is also true for organisations that see themselves losing out to competitors due to resource constraints.

Sony Ericsson provides an example of how a joint venture by two competing corporations was an important alliance for the long-term survival in the mobile communication sector. While both companies exist independently for their other products, they combined Sony’s electronic expertise with Ericsson’s technological leadership in the sector to forge a new entity that was solely concerned with developing mobile communication devices. Since its inception, there has been a turn in the development and conception of products, and strong growth in the sale of products.

In other cases, alliances have the benefit of bringing in capital for certain organisations to continue with their operations. This is done by forming cooperation agreements or allowing one or more organisations to purchase a stake in the other. While all entities operate independently, they have a joint mission of ensuring the success of all.

Renault is an investor in an alliance with Nissan, with a 44.4% stake. Nissan in turn has a 15% stake in Renault. Both had strengths in different world markets, and saw the alliance as an opportunity to increase sales and position as a strong brand in the world automobile industry.

Entering international markets is not a simple task for any organisation, with significant setup costs involved, as well as the collation of resources to manage. Hence, many organisations enter into alliances with organisations already operating in the region. This allows for the external partner to make use of already established assets and distribution links to market their product/s, as well as tap into the strong local knowledge-base for the future.

In 2004, Tesco Plc entered the Chinese market by signing an equal partnership joint venture agreement with Hymall [Taiwan-based hypermarket operator]. Hymall already owned 25 hypermarkets in China, thus giving Tesco a strong step towards shortening the gap with other competitors in the market, like Carrefour and Wal-Mart. The alliance allowed for Hymall to benefit from new management expertise and technology, while it allowed Tesco to enter, expand and gain an in-depth understanding of the Chinese economy, culture and consumption habits.

Strategic alliances in forms of cooperation agreements help organisations gain an outside perspective to their goals and plans, and provide an opportunity to learn. An example of this is the US automaker Chrysler, which includes all its European suppliers in its design team, enabling it to access the expertise of a wider group, and decrease time to production.

Disadvantages of Strategic Alliances

Like every partnership, alliances between organisations have their drawbacks. While the number of alliances and networks grow, with globalization a key reason, a high percentage end up reporting failures (Peng, 2006).

Establishing alliances can be risky. Unless a firm is careful, it can give away more than it receives. It means that, if the partner reckless of managing its know-how, it can be leaked to other partner.

Main Problems of Formation of Alliances

An important factor in the formation of strategic alliances is the goal or mission it is to achieve. Inconsistency amongst the partners can cause significant problems in the relationship, and a change in objectives can lead to conflicts over control. All involved parties should have parity on what they are trying to achieve from the alliance, especially where product development is the task and quality is imperative to survival.

Then there is the risk of control over knowledge and technology, and the chance of one partner losing key position due to sharing with others in an alliance. This depends on the level of interaction agreed on, but with success of an alliance at stake, partners will try to incorporate their strengths in the new entity, ending by giving away more than they receive.

When Ford and Mazda announced the joint establishment of a stamping and assembly plant in Mexico, both came into the alliance with different objectives in mind. Ford wanted to learn the art of lean manufacturing while Mazda was looking at a growth in its market. Mazda did end up gaining financially, but lost its edge in lean production to Ford (Baughn, et. al., 1997).

Similarly, when GM and Daewoo announced the formation of an alliance, they entered with contrasting strategic options. Daewoo show this as an opportunity to seek growth and access new markets, while GM was seeking favourable financial returns from the upcoming Asian markets. With a contrasting view, the alliance ends up costing all partners more than they expect to receive (Dacin, et. al., 1997).

International alliances are formed after crossing different legal systems. A key issue this results in the protection of intellectual capital, what is more commonly regarded as Intellectual Property Rights (IPR). When an alliance is formed, each organisation party to it is required to share resources and knowledge. The protection of this knowledge in international settings with partners following different codes, can lead to the chance of leakage of key information and technology.

Another pothole faced by organisations when forming international alliances is the culture difference. Each organisation has its own codes and way of working, consistent with its independent goals. When forming an alliance, and especially with an organisation from a different culture, there is significant work needed to bridge the gap.

In 1990, the US bearing company Torrington went to China in search for expansion. After 6 years of negotiations, it entered into a joint venture with Wuxi Bearing Group, a state-owned manufacturer, by establishing the Torrington Wuxi Bearing Company. The problems for the new setup came right at the start. With both companies coming from different organisational setups and cultures, it was hard for the management at Torrington Wuxi [mainly comprised of US managers from Torrington] to synergise with the workers. The incompatibility of the two alliance partners resulted in Torrington Wuxi producing three years of consecutive losses, with a lack of productivity and quality (Kwan, 2000).

Selecting an Effective Partner

As economic activities and globalisation intensifies, firms in all industries look towards growth and expansion. The formation of viable strategic alliances is an option used to deal with this necessity in an accelerated manner.

Choosing a partner for a strategic alliance is a risky task. The complementary skills offered by partners can vary significantly and finding compatible cultures and goals requires thorough analysis. A major reason is to find a solution to balance protection of intellectual capital with the openness and information sharing needed to jointly carry out the tasks for which the alliance is being created (Baughn, et. al., 1997).

The assessment of partners for strategic alliance can be broken down into four stages: in-depth research prior to initiating the alliance, bargaining with potential partner and forming an initial structure of the new entity, managing and controlling the alliance in a way complementary to all parties, and emphasizing the difference between individual trust and diplomatic trust between partners (Baughn, et. al., 1997).

The various steps that need to be completed by a company in order to complete a strategic alliance are:

Anticipation – this is the search phase where pre-alliance competitive needs and motivation emerges;

Engagement – the identification phase where strategic potential and complementary skills are assessed;

Valuation – the beginning of the negotiating process, with a focus on the financials as well as an analysis of the resources and intellectual capital of all parties;

Coordination – this is the stage when integration and interfacing is initiated, with a focus on the operations and division of labour tasks between the partners;

Investment – the expansion phase where choices on resources and commitments are made, along with a broadening of the scope of the alliance; and

Stabilization – this is when adjustments within the new entity are being made, with fine-tuning of the assessment of relative worth and contribution.

Prior to the above steps, the formative stages through which an alliance begins to take form can be categorized into the following three: vision, values and voice.

Vision can be linked to the strategic intent of the organisations looking to enter a strategic alliance. This is primarily the top management’s outlook to the following: “what can be”. Values is when similarities between corporate cultures of the partners is outlined and “mutually defined roles” are described in order to ascertain the position of each party within an alliance. Voice is critical to the formation of the alliance. It is when the vision is articulated and communicated effectively through the ranks, especially to the affected groups of the organisation (Spekman, et. al., 1996).

A good partner in a strategic alliance for any organisation must share the vision and goals, have the capabilities and resources required to complement the alliance, and bring a cooperative culture to reduce the risks of uncertainties. By doing so, the amalgamation formed provides a stronger security for a prosperous tomorrow.

Conclusion

“If you have a choice, don’t do them…Strategic alliances take an inordinate amount of management time, energy, and attention. It would be best to look for other ways to do business. I really mean it.” (Spekman, et. al., 1996)

The above statement was made by a retired senior executive of a firm whose success is based partly on its ability to form and sustain joint ventures and other forms of strategic alliances. It is not meant to paint a dim picture, but rather to clarify the extent of work that is involved in making alliances possible, in the first instance, and successful.

With increasing global competition and growth in almost all industries, companies have had to look for ways to not only maintain their survival, but in many cases, hold on to their positions in their market. Another factor is uncertainty of the future, which is evident by the current financial crisis. The lack of liquidity has forced many organisations, including financial institutions, to look at survival methods such as joint ventures, or in more extreme cases, long-term solutions like mergers. The fact that mergers and acquisitions have overtaken cooperative forms of strategic alliances for organisations signifies the change in stance that the global environment has thrust upon the business world.

Since the 1990s, the number of alliances has increased at a rapid rate. The revenue generated by the parent firms from these alliances has consistently increased, but a detrimental fact is that a vast majority of the alliances have ended up as failures.

The much heralded alliance of IBM and Apple in the form of technological cooperation lasted only a few years, with culture clash between the organisations described as the determining factor (Rigsbee, 2000). Then there was IBM’s alliance with Microsoft to develop an operating system for PCs [OS/2], and British Airways with both United and USAir (Robert, 1998).

For many firms, strategic alliances are the easy way to compete: if you can’t beat them, join them. One thing that they seem to underestimate is that by forming an alliance, you inherit the weaknesses of your partner along with the strengths. And there is the protection of a firm’s core technology and competency, which is essential to the survival in the first place.

Political circumstances which are frequently present in countries as a form of protectionism, can be considered strong motivators for alliances. Joint arrangements allow for easier by-passing of strict controls, and access to an understanding of the system that is prevalent in the market (James, 1985).

“If you fail to get it right at the start, it may cost you dearly to fix it later – that is if you are even permitted the opportunity to fix it.”

Curtis E. Sahakian

It is important for organisations to correctly analyse what to base their strategy on. An alliance should not be formed around products, but around the unique strength that is present within the parties. Products are short-term gains, but the core strength that an organisation brings to an alliance is a long-term benefit.

Prior to entering any form of alliance, an organisation must carefully assess the need for such a step, and ascertain all alternatives. The screening of possible partners for an alliance is imperative, as the level of trust and commitment of all concerned will determine the success of the alliance. Mutual respect for corporate cultures and organisational structures is imperative, as they form the building blocks for the new venture.

Texas Instruments and Hitachi undertook an incremental expansion of relationship when establishing an alliance. The primary reason for this was to bridge cultural differences, and the result was the transition from joint research to production of memory chips (Dacin, et. al., 1997).

Generally, small organisations and new entrants are more likely to enjoy the benefits of strategic alliances. Lacking scarce resources and with more likelihood of being threatened by competitive uncertainty, they are likely to see to forge agreements in order to keep access to future knowledge.

The success of an alliance is down to the support of management. The strategic intent of the involved firms should be tied to the alliance. The vision must be shared by all partners, and be drilled down through the ranks in order to create synergy. As markets are susceptible to changes, vigilance is the key and coordination on the course of action is imperative. Firms must ensure that an organisational culture that encourages and supports processes is established, with a better alignment between “what can be” and “what is” (Spekman, et. al., 1996).

Using the right framework [the strategy, goal, assessment of partners], partnering with the right organisation [strengths you need, weaknesses you can cope with, resources that are required] and developing the right relationships [trust, consultative approach, balanced organisational culture]; firms can use a strategic alliance effectively and maximise their value in a complex and changing business environment.

“Few companies have everything that they need. You may need money, customers or product. No matter what you need, there is someone who has it. That someone is a potential Corporate Partner.” Curtis E. Sahakian


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